Oanda offers online currency trading at near zero cost, even for retail customers
By CONRAD TAN
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HALFWAY across the world, a firm started by just two people is hoping to change the way most people view the world's vast currency markets.
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| Oanda's webpage: Its technology and the low cost of its online business model, make it possible for Oanda to offer spreads that are far below what banks can offer |
New York-based Oanda Corp aims to lower the cost of trading currencies to near zero, even for retail customers who have traditionally had to pay more than large institutions, its chairman and co-founder Richard Olsen told BT on a recent trip to Singapore.
'Currency is just a commodity. We want to really commoditise it - to bring down spreads to ultra-low levels,' he said.
Oanda offers currency trading and risk-hedging services through its website. To non-traders, it is perhaps best known for its online currency converter tools that are used by many firms, including Singapore Airlines, on their websites.
In February, Oanda launched its Asia-Pacific business based in Singapore and appointed K Duker, a former director of Deutsche Bank's online currency trading business in the Asia-Pacific, as managing director and head of Oanda's business in the region.
Oanda Asia Pacific Pte Ltd is the group's first office in Asia so far. It has about a dozen staff and is still expanding, said Oanda co-founder and chief executive Michael Stumm. Just last month, it hired Darrel Forrest as head of sales, from Royal Bank of Canada's Singapore office, where he was director of fixed income and currencies.
Mr Stumm said that customers from Asia-Pacific are the firm's fastest-growing customer base 'by far'. Despite the financial crisis worldwide, 'we see account acquisitions and new deposits at a record', he added.
Foreign exchange markets are generally believed to be the most liquid of financial markets, since it is usually possible to find a willing buyer for major currencies at any time, without incurring much loss. Proponents say that the huge volumes transacted daily also mean that forex markets are less vulnerable to price manipulation than equity markets.
Still, forex markets have traditionally been less popular than equity markets for individuals looking to take a punt, in part because forex trading takes place off public exchanges.
But the proliferation of online trading platforms such as Oanda, Forex.com, CMC Markets and FXCM, as well as similar services offered by major banks, has made it simpler for anyone to sign up online for an account and trade.
The firms act as market makers, quoting rates for different currency pairs. They earn their revenues from the spread, or the difference between the price that a trader pays to buy a currency and the price he can sell at.
But the vast trading volumes mean that the movements in currency exchange rates are usually much smaller - though more frequent - than the price changes for stocks.
That's one reason why firms that provide forex trading services to retail customers typically offer margin trading, which allows traders to bet many times the amount of cash, or margin, that they actually hold in their trading accounts. At Oanda, the margin requirement can be as low as 2 per cent, although it recommends that clients maintain a margin of at least 5 per cent. Some firms offer margins of just one per cent.
Margin trading is highly risky; it greatly magnifies both the gains and losses from bets - by 50 times, if the margin is 2 per cent. Losses can quickly wipe out an initial investment if a bet goes wrong.
But Mr Olsen, who has spent more than a decade studying extremely rapid price fluctuations in financial markets, suggests that the liquidity and high frequency of trades in currency markets can be turned into an enormous advantage, without the need for highly geared bets.
Since a currency trade always involves a pair of different currencies, it is possible to make a gain whether the value of a particular currency rises or falls - if you bet on the correct currency. That two-sided nature of currency trading also adds to its risk.
But with computer trading programs designed to detect and capture as much as possible of each upward or downward movement, what determines the maximum potential gain is no longer how much a particular currency strengthens against another, but the total size of all the movements - both up and down - in the relative values of a currency pair. For the most frequently traded currency pairs such as the US dollar/ euro - that total turns out to be an astonishing number.
'The 'coastline' - if you try to measure how much profit opportunity there is in foreign exchange - is something of the order of 2,500 per cent a year,' said Mr Olsen. 'That is, if at every turning point you get it right, you'll earn 2,500 per cent.'
That's a theoretical maximum, but he suggests that a return of several hundred per cent in a year is actually achievable. 'This, at a total risk that it goes in any one way, of a maximum of 30-40 per cent,' he added.
That sort of trading is only possible with specialist software, 'but there are today products that do this', he said.
According to Mr Stumm, since Oanda's beginnings in 1995, it has always been 'primarily a technology company that happens to be in financial services'.
'Our product, FXTrade, is where we generate all our revenue, but most of our effort and energy is spent developing technology to revolutionise the markets,' he added.
That technology, and the low cost of its online business model, makes it possible for Oanda to offer spreads that are far below what even the big banks can offer. 'The cost of every transaction, including all the overheads involved, is less than one US cent,' said Mr Stumm.
That's the source of Oanda's confidence, despite the influx of competitors, he added. 'For the early starters, it was easy to get into the market and to make a lot of money. But I think that as clients start to discriminate more, you ultimately will compete on price. That's our bet.'
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